Lease rate

[LeeBrittain]

Hi David,

I found two full length practice exams online, and in one practice exam they ask for the fair value of a futures contract given the spot price of wheat, the contract price, the risk free rate, and the "market rate of interest." Apparently the market rate of interest is extraneous information thrown in there to induce faulty calculations, however I just wanted to verify that the lease rate is always phrased the "lease rate", or is there other terminology that they use to call something the lease rate?

Thanks,
Lee

 

[David Harper CFA FRM]

Hi Lee,

Yes, "lease rate" is a specific commodity risk factor (and has appeared in a prior exam, as i recall from feedback). So, you are right, GARP would not confuse "lease rate" with "market interest rate"

(actually, market interest rate is unlikely to appear ... aside from the fact that it would be highly unusual to tease it as a false choice per the question, the term isn't in the AIMs ... we/they tend to use more specific language to denote the interest rate; e.g., spot or zero rate, forward rate, riskfree rate, lease rate, discount rate ... "market rate of interest" can be dismissed from the question merely on the grounds of ambiguity, nevermind it's not in the carry model!)

Thanks, David